Government plans new corporate criminal tax evasion facilitation offence 'before information exchange'

Out-Law News | 09 Dec 2015 | 5:21 pm | 4 min. read

The planned new corporate criminal offence of failing to prevent the facilitation of tax evasion should be finalised before the introduction of new international automatic exchange of information arrangements in 2017, the UK government has announced.

It has now published draft legislation which would create the new offence (43-page / 117KB PDF), subject to a further consultation planned for early 2016. The offence is broadly similar to that consulted on by the government earlier this year, although would now criminalise companies' failure to prevent the facilitation of tax evasion by their "representatives" rather than their "agents".

Organisations would be liable for the actions of "all persons who provide services on their behalf", but not those that act entirely independently, according to the government's response. This would cover third parties providing services to a client of the organisation if the organisation has "an element of control" over the provision of those services, but not the actions of third parties that they refer their clients to, it said.

Jason Collins, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com said “HMRC has thankfully rowed back on the unworkable aspects of the definition of ‘agent’.  Gone is liability for the acts of the staff of an intermediary.”

The government confirmed that the offence would catch non-UK based, as well as UK based, corporations which fail to prevent their representatives from criminally facilitating a UK tax loss. It would also catch UK based corporations which fail to prevent their representatives from criminally facilitating a tax loss overseas, where the overseas jurisdiction has equivalent laws in place to those in the UK.

It said "The Government notes the practical difficulties in relation to investigations and prosecutions of foreign corporations under the new offence, but does not believe that the potential for practical difficulties should preclude the possibility of holding a foreign corporation to the same standards as a UK corporation, where their representative has committed an offence under UK law"

Jason Collins said: “It will be very hard for the UK to force an overseas company to turn up in a UK court to face prosecution. You can’t extradite a company.”

“If the company has no assets in the UK then HMRC will resort to “prosecution by press release” -, leaving it to the foreign company to respond in the public domain,” he said.

 “This is the sort of legislation of which US law-makers would be proud.  It is a bold attempt by the UK to extend the arm of its law beyond its borders.  It needs to be matched with resources to police the offence otherwise it will become a damp squib.”Companies would have a defence if they could show that they had put "reasonable procedures" in place to prevent non-compliance by their representatives, according to the document.

The government said that it was "mindful of the need not to overburden corporations by requiring them to put in place procedures that are not proportionate to the risk posed by their operations". Its planned consultation will be designed to "ensure that the right balance is struck between ensuring corporations can effectively prevent and detect criminal wrong doing by their representatives whilst not requiring overly burdensome supervision that unduly hinders their activities", it said.

The government intends to specifically provide that a process that successfully detects and discloses wrongdoing is "likely to be found reasonable", it said. Next year's consultation will be accompanied by draft guidance on the new offence and the 'reasonable procedures' defence, it said.

The proposed new offence is part of a package of measures announced at the March 2015 Budget with the explicit purpose of tackling offshore tax evasion. The government also intends to create tougher financial penalties for offshore tax evasion, a new penalty regime for those who enable tax evasion and a new 'strict liability' offence when tax is unpaid on offshore income and gains, regardless of taxpayer intention.

Under the current law, criminalising a company whose representatives are involved in criminally facilitating tax evasion during the course of business requires the involvement of its "directing mind and will". The new offence would instead criminalise the company where it does not have reasonable procedures in place to prevent the actions of its representatives. The offence would be committed by the company alone, not by its senior management or board of directors personally.

The new offence would apply to all legal persons, including partnerships and charities as well as corporations. Where the organisation presents a lower risk of its representatives deliberately facilitating tax evasion, such as those in the charitable sector, the government intends to factor this risk into the consideration of what procedures are considered 'reasonable' for the purposes of the defence.

However, Jason Collins said " This new criminal offence is most squarely directed at financial services and professional services firms, but all sectors will be in scope.  Companies who commit the offence will have a criminal record which may hamper their ability to win public contracts ".

Organisations would not be liable for failing to prevent acts that were not done on their behalf, such as the actions of staff members in a private capacity, it said.

"However, where a corporation fosters a culture under which it is acceptable for staff to criminally facilitate tax evasion, and such practices are part of how the corporation does business, the corporation will not be able to say that its employee was not its representative when carrying out this tacitly approved act just because it had a formal policy forbidding the facilitation of tax evasion," it said.

"In assessing whether someone was acting on the corporation's behalf, it is the true substance of what was actually in fact permitted, not the existence of formal statements that matters. The existence of a formal policy would be a factor to be considered when deciding whether the corporation had taken reasonable steps, but so would the extent that compliance with that policy was monitored and enforced," it said.